Economic Commentary

Economic growth remained buoyant in Q2: Weekly Economic Review & Outlook

July 31, 2023
A store owner holding a plate of baked goods.

Real GDP growth continued to expand at a solid pace in the second quarter, due in part to strong growth in business investment. At the same time, the PCE inflation and wage growth readings moderated, though both remain too elevated for the Fed’s comfort. In total the data support our view that the Fed’s rate increase last week marks the last for the cycle. However, the still fast pace of inflation and wage growth keeps the door open to further rate hikes.

Key Takeaways:

Please Include 2-4 bullet points at around 350-360 characters total that summarizes what the blog article is about and what the reader can expect.

What we learned last week: (pg. 1)

Another strong quarter for growth

Following the declines in the first half of 2022, real GDP growth has been consistently solid for the last four quarters.

Core PCE inflation slows in June

Although disinflation in the core PCE rate has been much slower than the headline rate, progress was evident in June.

What we’re watching this week: (pg. 2)

August 1: ISM Manufacturing

Manufacturing sector still contracting despite modest increase in ISM index

The manufacturing sector has experienced eight consecutive months of contraction due an anemic level of new orders. Federal reserve manufacturing surveys have depicted weakness across all regions of the country. The silver lining is that the prices-paid component has been trending lower in some regions and at the national level. On a positive note, firms’ expectations of business conditions over the next six months are hovering between flat to improving slightly. Taken together, we expect ISM manufacturing to remain in contraction, but to show a modest rise in the headline index.

August 3: ISM Services

ISM services index to decline slightly, but remain in expansion

Consumers continue to unleash their pent-up demand for services. The strong job market and wage gains provide the wherewithal for such spending to continue at least in the near-term. Within the services sector, transportation, recreation, food services and accommodations are remaining sturdy throughout the summer. As such we look for the July’s ISM services index to be little changed and remain securely in expansionary territory at 53.5.

August 4: Nonfarm Payrolls

Job growth expected to increase in July

We look for nonfarm payrolls to advance 225,000 in July, up slightly from the 209,000 gain in June. July’s consumer confidence reading jumped with both current conditions and expectations rising, reflecting the strength of the labor market. The Conference Board’s jobs plentiful index ticked higher, while the jobs hard-to-get index fell to lowest since March 2022. These measures signal an increase in employment gains and a decrease in the unemployment rate back to a low of 3.5 percent. Providing further evidence of a still strong labor market, jobless claims have dropped for three consecutive weeks.

Analysis: Solid real GDP growth does not change outlook for rates

Solid real GDP growth does not change outlook for rates

Real GDP grew at an annualized rate of 2.4 percent in the second quarter, which outpaced consensus expectations and the Fed’s estimate for underlying potential growth (1.8 percent). The sturdy growth was due to an acceleration in non-residential investment, which was up 7 percent annualized on the quarter versus 0.6 percent in the first quarter. In the details, businesses ramped up investment in equipment (+10.8 percent) and structures (+9.7 percent). Investment in inventories also swung from a large drag on growth in the first quarter (-2.4 percent) to a slight contribution of 0.1 percent in the second quarter.

On the downside for growth, real consumer spending slowed from a buoyant 4.2 percent gain in the first quarter to a more moderate 1.6 percent advance, with expenditures on services leading the gain. Spending on services rose an annualized 2.1 percent though slower than the 3.2 percent gain in the first quarter. Residential investment continued to be a drag on growth for the ninth straight quarter, falling 4.1 percent despite the recent upturn in housing starts.

Although growth came in above consensus estimates, it was within our expectations and, as such, does alter our view that, with inflation gradually cooling and economic activity poised to slow in the second half, the Fed can now hold rates steady into 2024. However, until the Fed sees evidence of the labor market easing and importantly inflation slowing, it will retain a hawkish leaning and the door remains open to further tightening if deemed necessary.

Analysis: Progress continues on the inflation front

In other news watched closely by the Fed, both overall and core PCE prices rose by just 0.2 percent in June, with the year-over-year rates slowing to 3.0 percent and 4.1 percent, respectively. Moreover, core prices are up 3.4 percent annualized over the last three months — while not a victory over inflation by any stretch, it is the slowest three-month annualized rate of core inflation since February 2021.

On the consumer side, the June consumption data show that spending remained buoyant, and the resilient strength of the consumer in June indicates good momentum heading into the third quarter. The gain was led by a jump in real durable goods consumption of 1.7 percent, boosted by a strong rise in auto sales. Real services spending was softer at just 0.1 percent, though we anticipate that picks up given the strong summer travel season.

The second-quarter employment cost index (ECI) also brought welcome news as the softer ECI reading shows that wage growth is decelerating (although, like inflation, it remains elevated). The key private wages and salaries measure rose a slower 1 percent in the second quarter, following a string of 1.2 percent gains posted in each of the prior three quarters. The year-on-year rate fell to 4.6 percent from 5.2 percent. Within the mix of private wages and salaries, the downward trend is led by much slower goods-sector wage growth.

The deceleration in inflation and wage growth amid still strong consumer spending is encouraging. However, with the pace still running well above what the Fed considers consistent with the long-run 2 percent inflation rate, the Fed will maintain its hawkish and vigilant stance. The key will be the upcoming inflation and employment readings ahead of the next FOMC meeting in September.


  • The information in this report is provided by Nationwide Economics and is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person.

    The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness.

    Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. © 2023 Nationwide.